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January 9, 2012

Best 10 Investment Picks for 2012: Morgan Stanley

Morgan's Global Investment Committee released a list of 10 investment opportunities it believes “offer attractive valuation and other attributes fitting to the times.”

Morgan Stanley headquarters in Times Square. (Photo: AP)

Morgan Stanley Smith Barney’s(MS)Global Investment Committee said Monday that despite “policy disarray on both sides of the Atlantic,” the global economy should “avoid recession due to emerging market growth.” The group also released a list of 10 investment opportunities it believes “offer attractive valuation, portfolio diversification, income generation and other attributes fitting to the times”—including equities, fixed income and alternatives assets.

According to the report, both Morgan Stanley and Citi (C) economists expect GDP growth in emerging-market countries to top 5% in 2012. The investment group is cautious with respect to assets with certain risk profiles, but concludes there are “varied” areas of opportunity. (Five of the group’s ideas target income generation in a low interest rate environment.)

The group notes that in 2011, the MSCI All Country World Index fell 4.3%. High-yield bonds, though, had total returns of 7.2% total return.

1) U.S. Large-Cap Growth

Large-cap stocks tend to be more defensive than mid- and small-cap stocks, according to MSSB, and “typically outperform them in adverse market conditions.” Also, large-cap stocks are now “historically cheap” relative to mid- and small-cap stocks.

2) Dividend Aristocrats

MSSB points to the S&P 500 Dividend Aristocrats Index, which includes 42 large-cap, blue-chip companies that have raised dividend payouts annually for at least 25 years. “Companies in the index have solid franchises in the health care, consumer products and materials sectors,” the group explained, and can offer “an attractive source of income.”

3) Global Gorillas

Investment in large, developed-market companies with “outsized exposure to the emerging markets … is another way to capture the growth from those markets,” says the MSSB investment group. Emerging-market economies, it notes, now account for up to 80% of global GDP growth. (Its benchmark is the S&P Global 100 Index.)

4) Emerging-Market Equities

The MSSB group says that emerging-market economies are “on much better footing than their developed-market counterparts.” This is due to strong domestic demand, and the fact that many of EM countries do not face debt burdens similar to those of developed countries, “allowing for more fiscal policy flexibility.”

5) Investment-Grade Credit

The strong balance sheets of investment-grade companies should enable them to “better withstand a slowdown in economic growth than at any point in recent history,” says Morgan Stanley. The wide spread — or yield advantage versus low risk-free rates — and lower volatility relative to other risk assets make “a compelling case for investment-grade corporate bonds. Morgan's benchmark is the Barclays Capital US Aggregate Corporate Investment Grade Index.

6) Short-Duration Bonds

Morgan Stanley Smith Barney is boosting its allocation to safe-haven assets and says that short-duration fixed income offers “favorable yields relative to cash.” The group cites the potential for a recession and concerns about ongoing financial risks in Europe as its top motivations for such a stance and notes that short-duration bonds reduce volatility.

7) Water

Urban growth may cause the demand for water to increase five-fold beyond essential requirements, according to MSSB data. Plus, climate change is shrinking the available supply, it notes, and the water industry is expected to go through “substantial transformation” in the near future. (MSSB’s benchmark is the ISE Water Index.)

8) High-Quality Municipal BondsFactors such as the relative value of these bonds versus US Treasuries, wide credit spreads, a historically steep yield curve and the expectation of continued low default rates “suggests that high-quality municipal bonds should perform well in the coming year,” MSSB says. The group defines high-quality bonds as those rated “A” or better and prefers those with maturities of 15 years or less.

9) Master Limited Partnerships

MLPs—limited partnerships concentrated in natural-resource industries that trade on a securities exchange—offer the tax benefits of the limited-partnership structure and the liquidity of publicly traded securities, according to MSSB. Plus, they tend to have “robust” quarterly dividend payouts. (As with real estate investment trusts, MLPs have a special status in the U.S. tax code.)

10) Managed Futures

Managed futures, which take both long and short positions in futures contracts and options on futures contracts in the global commodity, interest rate, equity and currency markets, tend to have low correlations of returns with stocks, bonds and other alternative asset classes, including hedge funds. In addition, managed futures have performed well in past adverse equity market conditions. (The benchmark is the CASAM CISDM CTA Equal-Weighted Index.)